The Anatomy of the Billable Hour

The “billable hour” seems like an everlasting topic in the legal industry. It is a center of many discussions between legal pricing experts. Even more so with the rise of the alternative fee arrangements (AFAs). After big interest in the comprehensive AFAs article, we provide you the opposite side of the coin. We bring you the coverage on the hourly based pricing. It is a long-standing approach still popular with many.

The hourly rate debate has two opposite sides. On the one hand are the supporters of the billable hour. On the other hand are the professionals who think the billable hour will become extinct. Why? Because of the new pricing models, lawyers incorporate nowadays.

We give you comprehensive information about the history and today’s hourly based billing. You’ll read how the billable hour spread in the legal industry, and what are the consequences for you.

We compiled the answers to some of the most disputable questions. Issues such as the pros & cons, and clients’ perception of the billable hour. Last but not least, we aim to incite you to continue the discussion. We want to provoke more thoughts and new opinions in the debate.

“Most law firms bill the majority of their clients on the basis of the hours worked by lawyers and paralegals multiplied by their standard billing rates.”

History of the Billable Hour

Capping legal fees per service was the main method of pricing in the distant 1800s. In the USA they capped it by state law, and litigation costs were usually paid by the losing party. In the beginning of the 19th century ABA declared contingency fees as ethical. They became the new way of creating profit. The 1930s and 1940s marked the transition of what was known as a capped system to base system.

The origins of the billable hour date back in the 1960s when the strict time tracking became famous. Here’s an interesting info from the members of the ABA Commission on Billable Hours. At the beginning of the shift many lawyers were keeping their time records in a rough way. They were writing them down on the inside of their file folders, so that they can remember them later.

The advocators of the timekeeping were the law firm consultants. They were advising lawyers to keep their accurate time records in order to make more money. By the last years of the decade, most mid-sized law firms were already using the billable hour.

Even decades earlier, lawyers used time as a starting point in their pricing mix. Back then, lawyers should’ve considered “the time and labor required” to perform legal service.

After the mass adoption of billable hours, law firms kept trying to increase profits. They were either increasing the rates of the attorneys, or the number of hours worked. It’s same as what many firms still do nowadays. According to the commission’s information about this period of the billable hour, system was working. Unfortunately, it stopped once the competition became too high.

It was too hard for lawyers to continue increasing rates in over to cover expenses. This led to the growth in the number of billable hours. The history of the billable hour unquestionably is didactic. It raises interesting thoughts as the following one.

“One concern, however, is that with each passing year, the lawyers who remember the practice of law before the billable hour decrease in number, and we risk losing their wisdom and perspective. In fact, the vast majority of today’s practicing lawyers have known only the practice of hourly billing.”, comments the ABA Commission on Billable Hours.

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The Pros and Cons of Hourly Rate

The history of the billable hour proves there are reasons which helped it endure decades. For these reasons it was also used by generations of attorneys. Some of the most emphasized reasons in defense of the hourly rates are the following:

✓ A simple way of measuring productivity

Billing by the hour makes it simple to measure the so called utilisation rate in law firms. It is the time spent on billable work. Utilization is dividing a lawyer’s billable hours by the total hours worked. Here’s a good example, given by Affinity Consulting Group. According to them if a lawyer works 3,120 hours in a year and bills 2,340 hours, his utilization rate for the year is 75 %. That means that 75 percent of that attorney’s time was spent on work that is billable to clients.

✓ Law firms get paid no matter what is the outcome

The billable hour is convenient for firms because they get paid regardless of the outcome of the case. The method is, on the flip-side, risky for the client. None incentives for efficiency exist on the side of their counsel since all time spent is charged. There is even an opposite incentive.

✓ Familiar and comfortable for lawyers

Billable hour is dominant also because most lawyers perceive it as familiar and comfortable. For decades, lawyers have used hourly rates as a primary pricing method. This premise makes it hard to leave their comfort zone.

✓ Easy pricing method for clients

Billing by the hour brings simplicity to clients when comparing and choosing their attorney. It’s a standard measure, it’s easy to explain to clients, and it doesn’t cause confusion.

The proponents of value pricing can highlight many disadvantages of the billable hour. Some of them are:

✗ Rewards inefficiency

One of the most criticized outcomes of billing by the hour is that it leads to inefficiency. “It penalizes those who are able to bring cases to a close quickly, and it also penalizes the able, those with greater professional knowledge and skill, as they will tend to work at a more efficient rate”, comments Lord Neuberger, Britain’s most senior judge, cited by The Telegraph.

✗ Creates budget uncertainty for clients

Another problem with the hourly rates is the difficulty to give clients a clear estimate of the costs. The uncertainty of the time needed to handle a matter leads to increased legal costs. This is one of the main factors causing frustration in clients.

✗ Doesn’t differentiate the value of the work done

The billable hour doesn’t “realize” that different legal services have different value to clients. It doesn’t correspond with the quality of the legal services provided. The hourly rate is the same whether lawyers think of the solution for your matter, or prepare a document.

✗ Stressed and overworked lawyers

According to the The Australian Financial Review prevalence of billable hours in the legal profession has caused mental health concerns. The main reason causing it, is the ongoing “chasing” and calculating hours. It’s fragmenting lawyers’ work into increments and creates tension in reaching the set targets. But let’s see how exactly law firms decide what the attorney hourly rates should be.

How Most Law Firms Set Their Hourly Rates

There are many factors law firms consider when setting up attorneys’ hourly rates. The rates can vary, depending on the size of the market, and its geographical location. They depend also on the experience of the attorneys, the overhead, and other factors.

Believe it or not, the hourly rates can go from $50 to $1,000 per hour (sometimes even more). Here you can check an interesting information about the firms with highest partner rates.

Examples of Firms Using Billable Hour

Many law firms understand both the advantages and disadvantages of hourly rates. Some of them have found interesting ways to offer them to clients. We’ve picked up several law firms that talk openly about their hourly pricing. They explain in details to clients what are the benefits of it.

Fredrikson & Byron, P.A. was founded in Minneapolis in 1948. The firm have grown into an international firm with over 270 attorneys in over 30 practice areas. The philosophy of Fredrikson & Byron is that they set a “fair minimum”. But, still providing equal pay the for equal amount of work. Their philosophy include:

We avoid staffing projects with more than a minimum number of appropriately experienced lawyers.

We serve a large number of mid-sized business clients, which encourages early assignment of direct client contact and increasing responsibility to associates.

We work on complex litigation cases and Fortune 500 company transactions, but associates are rarely locked into lengthy exclusive engagements.

Moore & Van Allen is one of the largest law firms in the Southeast. They, for example, have no minimum billable hour requirement for lateral attorneys. The firm’s expectation is that the associates will work diligently to deliver work quality. The firm recommends seeking additional assignments, so that associates stay productive.

Moore & Van Allen set a special focus on building meaningful relationships with clients. They do so by satisfying their expectations. “If an associate follows the above-described guidelines, the hours generally take care of themselves”, says Moore & Van Allen.

The Arizona law firm Campbell, Yost, Clare & Norell P.C. has an approach of mixing pricing options. The firm represents clients in business relationships and professional matters. The firm thinks that many clients are comfortable with the traditional billable hour method.

“The billable hour payment method is suitable to many businesses and many types of legal work. We acknowledge that preference and strive to provide cost-effective legal services within the parameters of that billing method. Our standard billing cycle is monthly, with itemized, detailed accounting for each timekeeper’s work and time spent on a matter.” ~ CYCN

Along with timekeeping, the lawyers give clients the option to pay using alternative fees.

According to the Wolfe Law Group in New Orleans billable hours is a very effective form of billing because the hourly fee guarantees that clients will get what they pay for.

“In many instances, the hourly fee can be a successful billing method. If you want ongoing general representation, or you need help in ongoing litigation, the hourly fee may be the perfect fit. The billing method itself is not fundamentally flawed; rather, it has been subject to abuses by attorneys who lack good faith, overcharge for work, and/or fail to keep their clients informed about billing standards and procedures.” ~ Wolfe Law Group

The firm ensures its clients in the hourly fees’ accuracy by installing several precautions. These are detailed invoices, consistent billing, blended rates for all attorneys.

The lawyers at Danks Miller Cory & Bridgers found the key to happy relationships with clients. It’s in the detailed explanation of the bill sent at the end of the month. The factors which define their hourly rates are the following:

complexity;

novelty;

difficulty of the questions involved;

the volume of business;

the overall demands on the firm’s resources and time;

The way to successful client representation is in achieving results at an affordable price. This is Danks Miller Cory & Bridgers‘s core message.

The Law Offices of Cramb & Marling also charge by the hour. What differentiate them is the interesting approach to describing the rates to clients. They point to their clients that they’re purchasing a service rather than a product. Here’s their explanation:

“A service renders benefits, however, those benefits may not be tangible at first. Even though a service may be provided, the ultimate desired result may or may not occur. This is because we cannot control all of the factors involved in handling your legal matter.”, says the lawyers at Cramb & Marling.

The firm provides comprehensive information about the factors determining attorneys’ fees, and billing. Like that the company gives its clients’ a peace of mind.

Clients’ Perception of Hourly Pricing

More and more law firm clients are demanding different pricing options. The leading factor driving the change in law firm pricing is clients. The latest Altman Weil’s survey shows interesting results. According to it, 68% of the asked firms have adopted AFAs in response to client requests.

How Law Firms Are Using Billable Hour in the Last Several Years

In the past several years law firms are moving away from the hourly rates. Here are some numbers to back it up. From 2011 law firms are continually increasing the amount of non-hourly based billing. The peak increase was in 2011 (57.9%) while this year’s percentage is 42.6%.

Another indicative result is that only 6.7% of the surveyed law firms say that they price only by the hour. Maybe most law firms are starting to think differently and agree with Robert Hirshon. He stated that:

“The billable hour is fundamentally about quantity over quality, repetition over creativity. With no gauge for intangibles such as productivity, creativity, knowledge or technological advancements, the billable hours model is a counter-intuitive measure of value.” ~ Robert E. Hirshon, president ABA, August 2002

The future of the billable hour is uncertain. But, it still plays a significant role in the legal industry, and in the way attorneys practice law. For now, we can only predict the destiny of hourly rates. Till then the clock in the legal profession will continue to tick in 6-minute increments.

If you want to learn more about the alternatives to the hourly rate, download our free eBook. It is a collection of the best pricing experts.